The rebound in home prices is picking up steam, with the Case Shiller home price indexes growing at their fastest pace since mid-2006 in a year-over-year basis. And while residential investment has now added to economic growth for the past seven quarters, home prices remain about 30% off their pre-crisis highs, climbing to levels last seen in 2003, Tuesday's data revealed. The gradual recovery in housing is set to continue, but expectations that it may drive a broader comeback appear overblown.

Home prices actually fell on a monthly basis, with the 10-city composite down 0.2% and the 20-city sliding 0.1%; 10 of the 20 cities saw falling prices, while New York, Boston, and Chicago have suffered more than six months of declines in the past 12.

Yet, a housing recovery is clearly taking hold. In a year-over-year basis, the 10-city rose 4.5% and the 20-city jumped 5.5%, growing at the fastest pace in more than six years. The southwest is mounting a solid comeback, with Phoenix and Las Vegas marking double-digit gains, closely followed by the southeast (Miami and Tampa); California is looking better as well. As some of the hardest hit areas by the financial crisis rebound strongly, the northeast and the industrial Midwest have been lagging, index chairman David Blitzer noted.

To November, prices have risen 8% to 9% from their early 2012 lows, when the Case-Shiller indexes double-dipped, and remain about 30% off their mid-2006 highs. And the recovery is set to continue: Barclays expects home prices to jump 6% to 7% this year, and then another 5% to 6% in 2014.

Housing is no longer a drag on economic growth, and residential investment has added 0.3 percentage points to real GDP, on average, over the past seven quarters. Housing starts are set to increase, averaging 1 million units in 2013 (they hit 861,000 in November) and new home sales averaging 430,000 (up from 377,000 in November). Returning demand should absorb supply and keep inventories low, Barclays research team says.

Those expecting housing to fuel a solid, broad-based economic recovery appear mistaken, though. Housing went from making up more than 6% of GDP before the crisis to 2.2% currently. A shadow inventory of about 3.1 million units remained alive and well as of mid-2012 (it used to fluctuate around 500,000 units in the years before the recession).

That means about 2.6 million units need to go through the system to cleanse the market. These would, in many cases, be distressed sales, which put downward pressure on prices given their decreased value. Major mortgage originators like Bank of America and Citigroup are still sitting on substantial stocks of depressed homes, while regulators are upping the heat on those involved in the subprime mess during the glory years, limiting credit availability.

Housing is recovering from a very low base and the market has picked up speed. This is clear when one looks at the homebuilders. On Tuesday, DR Horton reported earnings, beating top and bottom line estimates and seeing a jump in their order backlog, their net sales orders, and homes closed. This performance could be mimicked by KB Home, Toll Brothers, PulteGroup and others which have all seen their stock prices approach 52-week highs.

Still, the return of residential real estate is in its early days, and any recovery will be only gradual. As this last Case-Shiller report showed, prices fell on a monthly basis, and they have barely managed to return to 2003 levels. Homebuilders, which have mounted impressive rallies over the past six months, are seeing their valuations become increasingly harder to justify; they could also fall prey to old sins and become overextended. Furthermore, Ben Bernanke’s Federal Reserve has put all its chips on boosting housing through purchases of residential mortgage backed securities; even with record low mortgage rates, the market is barely picking up.

The conclusion should be that the housing market is clearly in recovery mode, but don’t expect that to translate into pre-crisis growth any time soon.